Markets are seen to tread cautiously on Wednesday with investors awaiting key developments in the week, including Fed Chair Powell's guidance on policy tonight and the G20 meeting on Friday

International theme: Calrida offers little clarity

Investors remain without clarity on the outlook as Fed Vice Chair Clarida gave relatively balanced comments overnight, indicating that the Fed should remain data dependent but that they were getting closer to the neutral rate. Investors have been cautiously optimistic of some form of headway with US-China trade talks with risk-taking activity likely muted until the end of the week.

China: Industrial profits severely squeezed

China's industrial profit growth slowed in October, with just 13 out of 41 sectors (including the consumer goods group) posting improved profits on a monthly basis. But businesses could enjoy better profitability in 2019 if China were to cut import tariffs on more goods

Slower profit growth a widespread phenomenon in manufacturing

Industrial profit growth slowed to 3.6% year-on-year in October from 4.1% in the previous month. This puts the year-to-date growth at 13.6% YoY in October, a slowdown from 14.7% YoY growth as of September. Comparing the two growth rate measures, it would seem the profit squeeze among Chinese manufacturers has been severe.

On a monthly basis, there was a widespread slowdown. Lower commodity prices, like ferrous metals and crude oil, could be blamed for shrinking profits at mining companies and energy drillers. There may also be expectations of lower demand for commodities due to a slowing economy.

Not everything is unprofitable, consumer goods held up well

There are some bright spots. Profits from manufacturing consumer goods held up quite well in the last month. Textile and garments, food production, computers, telecommunication, and other electronics were among the 13 sectors which enjoyed monthly profit growth.

We see this profit growth coming from:

Lower raw material and energy prices.

Steady demand for consumer goods, both from domestic and foreign economies.

China cutting tariffs could help lower production costs in 2019

Looking forward, production costs could be lower if China were to cut tariffs on more imports. This would offset higher tariffs on imports from the US, at least to some extent.

That's not to say an escalation of the US-China trade war won't hurt profits of Chinese manufacturers. It will, especially in terms of exports and related supply chain manufacturers. But if China were to cut import tariffs, more businesses will survive.

India: Lower oil price a boon, politics a bane for the rupee

In yet another revision, we lower our USD/INR forecast for end-2018 to 71.5 from 74.0 and for end-2019 to 69.0 from 73.2. In the meantime, mounting political uncertainty in the run-up to general elections in May 2019 makes us think the rupee will weaken past the 73 level in the next three to six months

Lower oil price a boon for the rupee…

The Indian rupee’s (INR) 4.4% month-to-date appreciation against the USD has it on track to be an outstanding Asian currency this month. At 70.9 the USD/INR has retraced a chunk of the 15% depreciation that drove the pair above 74.0 in the first 10 months of the year. The more than 30% collapse in the crude oil price since October explains the reversal of fortune for the currency (see figure).

The expectation of slower global growth amid an intensifying US-China trade war and increased supply are depressing the oil price ahead of the OPEC meeting in early December at which US - Saudi Arabia diplomacy will weigh heavily on future supplies.

Reading time around 3 minutes

Good MornING Asia - 28 November 2018

Markets are seen to tread cautiously on Wednesday with investors awaiting key developments in the week, including Fed Chair Powell's guidance on policy tonight and the G20 meeting on Friday